Your HR and Payroll compliance and policy solution! Comply with federal, state, and international laws, find answers to your most challenging questions, get timely updates with email alerts, and more with our suite of products.

In the last 40 years, the estate planning world has, in the parlance
of some, divided into "domestic" and "off shore" practice
areas. As the off shore asset protection trust (OAPT) industry has grown, with
promoters holding out to U.S. citizens that they can prevent creditors from
reaching the assets in the trust and perhaps also reduce US income tax and
other U.S. taxes, various U.S. courts and federal agencies have wrestled with
the legal implications of these off shore trust structures.

The IRS imposes certain reporting requirements on U.S. taxpayers
with off shore trusts. U.S. citizens, resident aliens, and certain nonresident
aliens must report worldwide income from all sources, including foreign
accounts. Income from those accounts is taxable in the United States. The IRS
recognizes that there are many legitimate reasons for holding off shore
accounts, including convenience, investing, and facilitation of international
transactions. However, the use of an off
shore trust or entity to avoid the payment of tax is not allowed. In
most cases, taxpayers with off shore assets need to fill out and attach
Schedule B to their income tax returns; Part III of Schedule B requires
information about foreign accounts and usually requires reporting of the
country in which each account is located. Certain taxpayers may also have to
fill out and attach IRS Form 8938, Statement of Foreign Financial Assets.
Additional filing requirements apply to those with foreign trusts.

Additionally, a taxpayer whose foreign accounts are greater than
$10,000 at any time during the year must file by June 30 each year a Form 114, Report
of Foreign Bank and Financial Accounts (FBAR), electronically through
FinCEN's BSA E-Filing System. (For more details on reporting for foreign
accounts, see Heimos, Reporting Requirements for Foreign Accounts,
39 Tax Management Estates, Gifts and Trusts J. 140 (May-June 2014).

The U.S. bankruptcy courts have considered off shore trusts, created
under the laws of jurisdictions such as the Cook Islands, Jersey Channel
Islands, and Bermuda, have held that the situs for determining if creditors are
able to reach the assets is determined under U.S. situs law, not the situs of
the OAPT.1

In 1999, the Federal Trade Commission (FTC) also became interested
in the off shore trust world. Federal Trade Commission v. Affordable Media,
LLC2 (often referred to as the Anderson
case) dealt with a couple who had established a Cook Islands trust that had a
provision directing any foreign trustee to refuse repatriation if the couple
was under "duress." The FTC was interested in the Cook Islands trust
because its settlors, the Andersons, were involved in a late-night television
telemarketing venture that offered investors the opportunity to invest in
products such as talking pet tags and water-filled barbells. The investment
opportunities, however, turned out to be a Ponzi scheme, through which the
Andersons took fees from investors who were never able to recover their
investment, much less make money, and then moved the millions in fees into a
Cook Islands trust. The trust was poorly structured, with the Andersons
themselves named co-trustees and trust protectors, positions from which they
had unsuccessfully tried to resign at the last possible moment. The United
States District Court for the District of Nevada concluded, and the Ninth
Circuit confirmed, that the Andersons remained in control of their trust and
could repatriate the trust assets, and when the Andersons failed to comply with
the order directing them to repatriate the trust assets, held them in contempt.

The interest of the Securities and Exchange Commission (SEC) has
grown over the last 14 years when citizens' actions really cross the line,
resulting in convictions for securities fraud and conspiracy to defraud the
United States. In Securities and Exchange Commission v. Bilzerian,3 the taxpayer, a one-time corporate
raider, transferred assets to a "complex ownership structure of off-shore
trusts and family-owned companies and partnerships" after the SEC started
insider trading proceedings against him. The taxpayer was held in contempt
after failing to attempt to repatriate the off shore assets in accordance with
a court order.

Case

More recently, in May 2014, the Southern District Court of New York
held Samuel Wyly and his deceased brother, Charles Wyly, liable for civil fraud
in failing to report stock sales by four off shore trusts and subsidiary
entities located in the Isle of Man and profits of $553 million and, as part of
the subsequent remedies phase of the case, the court ordered the disgorgement
of all of the profits earned through their offshore transactions as follows:
$123.8 million against Samuel, $63.9 million against Charles and his estate,
with prejudgment interest that could result in $300 to $400 million in
penalties.4 The Wylys sat on the boards of the
publicly-traded companies in which the off shore trusts and entities traded,
including holding warrants and options. The Wylys ceased to file required
reports with the SEC after transfers to offshore entities because they did not
want there to be "inconsistent positions in their SEC and IRS filings when
millions of dollars were at stake."

Of note is that lawyers' memoranda and meeting summaries were
admitted into evidence. Clearly, there were repeated discussions about the
grantor trust status of the off shore trusts for income tax purposes and
whether purchase of option and warrants resulted in the off shore entities
having taxable, reportable income and also whether renouncing citizenship could
help avoid income taxes in the United States. Also, the court learned of a
non-name meeting between three of the brothers' attorneys and IRS officials in
2003 (before the IRS had initiated an investigation) to discuss voluntary
disclosure; the attorneys learned that the IRS was very interested in whether
or not SEC requirements had been ignored.

The judge (Judge Shira A. Scheindlin) recognized that the penalties
being imposed were large, quite large: "By any reasonable measure, the
disgorgement and prejudgment interest awarded in this proceeding will be
staggering and among the largest awards ever imposed against individual
defendants."

Conclusion:

The federal government wants more and more information about off
shore trusts, investments, and companies in which U.S. citizens have interests.
Clients with off shore interests should expect inquiries in one or more of the
following areas: (1) Bankruptcy, especially on issues of choice of law; (2)
FTC, if the activities that generated the monies that are then invested off
shore violated FTC rules; (3) SEC, where individuals fail to comply with SEC
reporting rules with respect to their off shore trusts and entities; and (4)
IRS, where off shore trusts and entities have failed to comply with IRS
reporting rules or are being used to improperly avoid paying U.S. income taxes. Thus, off shore trusts face not only
creditors bringing actions in state court, but various federal agencies
attacking positions taken by the settlors and beneficiaries of such trusts.

For more information, in the Tax Management Portfolios, see
Rothschild and Rubin, 810 T.M., Asset Protection Planning, Zaritsky and
Rosen, 854 T.M., U.S. Taxation of Foreign Estates, Trusts and
Beneficiaries.

All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to books@bna.com.

Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)

Notify me when updates are available (No standing order will be created).

This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to research@bna.com.

Put me on standing order

Notify me when new releases are available (no standing order will be created)